When the Defined Benefit Pensions "Cash for Life" Doesn't Help

December 5, 2017

The Defined Benefit Pension is slowly becoming a thing of the past. Gone are the days when you can work for an employer for 30 years and retire knowing you will have a set amount of income provided by said employer for as long as you live. There are only a few defined benefit pension plans left in Canada, mainly due to the cost of keeping them afloat for such a long period of time. With people living longer and longer, companies will be on the hook to make payments further into the future.

But what happens when you have this glorious pension but a shortened life expectancy? That’s the issue that was brought to me by a client recently. Let me walk you through the tough decisions that we were faced with.

When you leave an employer with a defined benefit plan, you have 2 options: leave the money in the plan and start to take your guaranteed income when you retire or take the commuted value (not sure what that means? Call our office and we’ll explain it to you) and move it to a new plan or manage it yourself (with the help of an advisor, obviously).

The first question I asked her was “what is most important to you right now?” Her response was spending time and making memories with her kids while she is able to do so. She also wanted to make sure her kids were taken care of when she’s gone.

With that in mind, I ran the numbers around her options. The value is estimated at $380,000, and her plan restricts income until age 55, 13 years from now. At that point, she would only receive 81% ($1,100 per month for life). If/when she dies, her husband would receive 60% of that ($660 per month) for his life. After he dies, all payments stop.

Based on my math, her husband would need to live until age 98 to receive the full amount of the plan, which is unlikely. Plus, when he dies, the kids get nothing. No legacy.

Through many emotional meetings, we decided that taking the money out and forgo the guarantee in return for freedom. The freedom to take money out for a trip to Disney, or a cruise (heck, even a Disney cruise), freedom to increase her income during the times she is able to enjoy her family and reduce it if she's not 100%. She controls the money, she controls the income, she controls the tax.

There are a number of reasons why you might not want to stay in a defined benefit plan; reduced life expectancy, not confident the company will be there in 10 years (see Sears Canada), want access to the funds...

If you are part of a defined benefit plan, consider yourself lucky, but don't be blinded by the guarantees. Sometimes, the math doesn't line up with your goals and desires.

Kenneth Coombs CFP CHS RRC

Ken has 13 years experience in the financial services industry, is a Registered Retirement Consultant and a Certified Financial Planner. Ken has written financial planning columns and has been a guest on financial radio and podcast programs.